What is the effective interest rate for the borrower

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Reference no: EM131327341

John wants to buy a property for $105,000 and wants an 80 percent loan for $84,000. A lender indicates that a fully amortizing loan can be obtained for 30 years (360 months) at 8 percent interest; however, a loan origination fee of $3,500 will also be necessary for John to obtain the loan.

a. How much will the lender actually disburse?

b. What is the effective interest rate for the borrower, assuming that the mortgage is paid off after 30 years (full term)?

c. If John pays off the loan after five years, what is the effective interest rate? Why is it different from the effective interest rate in (b)?

d. Assume the lender also imposes a prepayment penalty of 2 percent of the outstanding loan balance if the loan is repaid within eight years of closing. If John repays the loan after five years with the prepayment penalty, what is the effective interest rate?

Reference no: EM131327341

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